👋🏾 Hi friends!

It’s been a bit of a whirlwind weekend as I surprised my (much!) better half with a trip to Italy to celebrate her birthday with her family - for the first time since she moved back to the UK back in the early 2000s to boot.

We reminisced over all the moments and memories we’ve shared over the last 20 years. I’m pretty sure we made a few new ones to keep us going over the next twenty.

But, of course(!), I found the time to get a few words down and provide a bit more actionable insight and context to whatever you’re building and to your day 😊

On a side note, I’m super excited to be leading the CFOs and Financial Modelling session for the EMEA cohort of Morgan Stanley’s Inclusive Venture Lab this week. It’s always such a pleasure to meet these incredible, diverse founders and learn more about what they’re building 🚀

In this weeks Off Balance, I’ll be chatting about:

🇮🇱 A brief word on the events in Israel
🏦 How to think differently about where to get your debt
📄 Employee Equity Schemes - understanding the basics

Oh, and the new look Nothing Ventured Season 5 went live today!

Check out this Primer where I get to know Mark Kleyner and why he’s building Dream VC, the investor accelerator for Africa 🚀

Also if you have any feedback or if there’s something you’re desperate to see me include, just reply to this mail or ping me online - I’m very open to conversations.

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Now let’s get into it.

A brief word on events in Israel

Events that have unfolded over the weekend with mass devestation caused by attacks on Israelis by Hamas has been met with condemnation by leaders across the world.

I have no doubt that Israel’s response will be swift and will likely be brutal and, as the conflict escalates, will almost certainly cause more civilian casualties and losses on both sides.

I have no skin in this game and I don’t wish to opine on something where I neither hold expertise, nor where it does not immediately impact me or those around me.

However.

I do have family in the region and many Israeli and Jewish friends
I have interviewed several Israelis on my podcast, most of whom are ex IDF
I am concerned about the impact this has on innocents on both sides
I can’t assume that conflict will not spill over in impacting the rest of the world

I would love for there to be a swift and peaceful resolution to what has already been declared a war but I do not hold out much hope.

One thing I can say unequivocally is that there is no excuse for terrorism nor the premeditated and gleefull taking of innocent lives, that should be abhorrent to anyone whatever your thoughts on the politics of it all.

How can did I add value?

A couple of weeks ago, an angel I know asked if anyone could introduce one of their portfolio company founders to any debt providers.

I actually knew the company and the founder having done some work for them way back in 2019. (Side note - do you also intuitively bucket everything into pre and post pandemic eras?)

The business is already established and doing quite well and has a hardware and software element to it.

After speaking to the founder, it was clear that what they were after was a working capital facility that would help them fund inventory.

This would help them to grow further.

If you’re ever in this situation, there are a number of routes that you could consider taking:

🏦 Speak to your existing bank / financial institution

Pros: Should have a variety of products that you can access and there is an existing relationship which should mean a ‘quick’ decision.

Cons: Traditional insitutions are not known for having the hungriest of risk appetites so you may get to a yes but only after having jumped through a few hoops and having had to offer up a variety of different securities like personal / directors’ guarantees, a lien over the business or even a physical asset (like your home). Oh and a bunch of covenants that you have to maintain (things like interest cover, debt ratios, quick ratio and more) and report back on regularly (typically monthly).

📈 Use a revenue based financing company

Pros: There’s typically a very quick turnaround once hooked into your systems. Repayment scales up and down with your revenue (i.e. if your revenue drops so does your repayment).

Cons: Restricted number of products, and although most do offer some form of inventory financing, others won’t. Fees and equivalent interest costs can be quite substantial and they may not be able to lend the sort of quantums you may need.

🔬 R&D Funding

Pros: Once you have a track record of submitting and being repaid for R&D undertaken in your business, you will probably qualify to secure a loan from specialist lenders specifically against the R&D due in your next claim.

Typically the lender will just add the interest to the principal loan amount and the whole lot would become repayable at the earlier of the R&D claim being paid out by HMRC or a long stop date normally set to a couple of months after you would expect to get paid out. This helps avoid the need for planning monthly payments, and if you are confident your claim will be paid by HMRC then the loan is pretty much covered.

Cons: You are likely to only be able to draw down a maximum of 80% of the total claim value, which may not be sufficient for your working capital needs. In the current environment, HMRC is pushing back hard on what qualifies for R&D, so whilst you may have claimed in the past, you are not guaranteed to qualify now. If the claim isn’t paid out, you’re still on the hook for the capital and interest.

💰Venture Debt

Pros: Lighter touch diligence than traditional lenders and potential to pay interest only.

Cons: Venture debt is a specialist type of product which many institutions do not offer, so it can be hard to secure. Equally, it is often issued as part of a significant institutional equity round (so you need to raise from a VC). You may still have negative covenants (things that you are not allowed to do without specific approval) and you will likely also have to issue warrants (an instrument giving the lender the right to purchase shares in the future at an agreed price). This means more dilution - given that one of the main reasons to take out debt is so as to not dilute existing shareholders any further.

And there are no doubt other lenders and debt products out there that this founder could have looked at.

BUT

What I actually told them to think about was approaching an existing investor (especially an angel) to see if they would lend the required amount.

This is something that the founder had not considered, but realised that it made sense. They also had individual angels who had invested 7 figure amounts into the business and had the ability to write large cheques.

Overall there are several pros to going to an existing investor:

➡️ They have an existing relationship with you and the business.
➡️ They are able to make decisions quickly.
➡️ They are incentivised for your business to succeed.
➡️ They are also incentivised to not have further dilution.
➡️ They are less likely to insist on further security.
➡️ They are more likely to negotiate a good interest rate.
➡️ They are more likely to renegotiate in good faith in the event of trouble.

The biggest con would be a potential falling out with the investor should you become delinquent with the debt.

With that said, and having done and seen this done in a number of business, given the fact that your investors want your business to succeed, there is already huge alignment and a great opportunity to strengthen your relationship with them.

I’d love to hear if anyone has done this themselves and what your experience was. Drop me a message!